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Home | Events | Firms vs. Banks: Who Benefits from Credit Guarantees?
Seminar

Firms vs. Banks: Who Benefits from Credit Guarantees?


  • Series
  • Speakers
    Victoria Vanasco (Centre de Recerca en Economia Internacional – CREI, Spain)
  • Field
    Finance, Finance
  • Location
    Tinbergen Institute Amsterdam, room 1.01 Amsterdam
    Amsterdam
  • Date and time

    February 28, 2024
    12:45 - 14:00

Abstract
Governments often support private credit with guarantee schemes, compensating lenders for borrower defaults. Such schemes often rely on banks to allocate guarantees among borrowers, but how banks do so is not well understood. We study this in an economy where entrepreneurial effort is crucial for efficiency but not contractible, creating a debt overhang problem. Credit guarantees can alleviate this problem only if they lower repayment obligations. We show that banks follow a pecking order, prioritizing risky, highly indebted firms from whom they extract more guarantee surplus by increasing repayment obligations. The competitive equilibrium is inefficient: a social planner would tilt the allocation towards more productive firms and pass all benefits through lower repayments. Our findings align with evidence from guarantees granted in Spain post-COVID.

Link to the paper.